2022 (7) TMI 842 - AT - Income Tax

Disallowance of interest expenses - 1st allegation of the Revenue was that the necessary documents were not furnished by the assessee with respect to the interest expenses incurred - HELD THAT - We disagree with the contention of the revenue on the reasoning that the assessee before the CIT-A has claimed to have furnished the necessary details to establish the genuineness of the interest expenses and this contention of the assessee was not controverted by the learned CIT-A. Accordingly we can safely infer that all the details relating to the interest expenses were available before the AO during the assessment proceedings. Besides the above we have referred the paper book filed by the learned AR running and note that the assessee has filed the capital account maintained in the partnership firm which is placed - DR at the time of hearing has also not brought anything on record contrary to the arguments advanced by assessee. Thus, we hold that the expense shown by the assessee in the form of interest to the partnership firm is genuine. Whether the interest expense can be adjusted against the interest income? - As relying on Raj Kumar Aggarwal 2014 (7) TMI 867 - ITAT AGRA we hold that the interest expense was incurred by the assessee on the money borrowed from the partnership firm as he failed to recover the deposits from the company. Thus, in our considered view the interest expenses are directly connected to the interest income which the assessee has received on the deposits from the company and thus eligible for deduction. In view of the above the ground of appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of interest expenses against interest income.

Analysis:
The appeal was filed by the Assessee against the order of the Learned Commissioner of Income Tax (Appeals) concerning the disallowance of interest expenses against interest income for the Assessment Year 2016-2017. The Assessee had borrowed money from a partnership firm for purchasing residential property and incurred interest expenses of Rs. 18,20,448, while also earning interest income of Rs. 19,51,695 from deposits in a company. The Assessing Officer (AO) disallowed the interest expenses, stating they were personal in nature and not related to the interest income. The Assessee contended that all necessary evidence was submitted, and if the deposits were repaid by the company, no interest expenses would have been incurred.

The Assessee argued before the learned CIT-A that all relevant documents were provided during assessment proceedings, and the partnership firm had declared the interest income received from the Assessee in its tax return. The Assessee explained that the funds deposited in the company were not repaid due to the company's liquidity issues, leading to borrowing from the partnership firm. The learned CIT-A, however, upheld the disallowance, considering the interest expenses as personal and not deductible against interest income.

The ITAT disagreed with the revenue's argument that necessary documents were not furnished, as the Assessee had provided details establishing the genuineness of the interest expenses. The ITAT reviewed the case facts and documents, confirming the genuineness of the interest expenses. The ITAT also noted that the Assessee's failure to recover deposits from the company necessitated borrowing from the partnership firm. Citing a relevant case, the ITAT held that the interest expenses were directly connected to the interest income and eligible for deduction. Consequently, the Assessee's appeal was allowed, and the alternate contention was not addressed as the primary issue was resolved in favor of the Assessee.

In conclusion, the ITAT partially allowed the Assessee's appeal, ruling that the interest expenses could be deducted against the interest income. The alternate contention raised by the Assessee was deemed unnecessary to adjudicate, and the appeal was partly allowed.